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How I Trade Options

Written by Briton Ryle
Posted April 10, 2019

One of my coworkers hit me up on the company messaging thingy on Monday with a question about trading stock options.

Mike is one of our marketing people. He follows Google's ever-changing content algorithm so that what we write can actually survive on the internet.

Believe it or not, Google is very picky about how articles are structured and stored on the internet. If you don't meet the Google standard, you will be essentially banned. Google accounts for 95% of internet search and 20% of all email delivery. If you can't make it on Google, you can't make it anywhere. 

From my perspective, Google is absolutely a monopoly. It basically runs the internet. And now that I've openly questioned Master Google, I've probably ensured some kind of probationary status for Angel. Sorry about that...

Anyway, I love the fact that Mike is starting to trade options. And I'm flattered that he came to me to see what I thought. I realized that some of you might have similar questions, so I decided to make this the topic of today's Wealth Daily

So here's Mike's message from Monday (hopefully Google likes alliteration): 

Mike [6:13 p.m.]

Could i be so bold to ask you what your thoughts are (if any) on PNC 129 call options exp. april 12th? (symbol: *PNC190412C00129000*)

They announce earnings before market on friday and was wondering if that would be a decent options play? was also thinking about some other calls with a little further expiration date like 18th or 26th.

Since you're the only one in here i know that really trades options i figured id ask what you thought. no worries if you're too busy for those kinda questions tho

Now, don't worry about the details of Mike's question. He's simply saying that he thinks PNC Bank (NYSE: PNC) is gonna rally after it reports earnings on Friday and that he thinks he can make some loot with an upside trade. 

It's Just a Trade

The crux of Mike's question isn't really stock options; it's about PNC stock itself and why it's going to go up. It's a trading question. The call option is simply a vehicle — a simple way to put real money down on the trade. 

So here's the next part of our little discussion:

Brit [11:31 a.m.]

Couple things, personally, don’t like trading earnings. Options tend to be more expensive close to earnings, and the move after earnings can be unpredictable

Is there a reason you like pnc?

Mike [11:34 a.m.]

Theyre expected to beat earnings for q1 and it seems like they are starting to recover from a dip in december and then in march. when theyve beaten earnings in the past, the stock usually gets a nice bump so i was anticipating that.

Brit [12:08 p.m.]

I only trade options on a few stocks. Cuz I can’t handle too much info. I usually have like 5 stocks that I like and I get to know them very well

Seems like every time I trade a stock I don’t know well I lose

Mike [12:12 p.m.]

yeah ive noticed you like Bank of America and Twitter, i loaded up on twtr calls at 35.50 (exp. 4/26) yesterday

Again, at this point of our discussion, Mike and I are barely even talking about stock options. 90% of making money with options has nothing to do with options at all. It's about getting a handle on where a particular stock is headed.

Once you get a feel for where a stock is headed, it's easy to use options to turn a 3–5% move for a stock into a huge 100–200% gain.

Let's Go to the Charts, Mike

Back in the old days, when there were actual live human beings on actual exchange floors in New York and Chicago, there were people called "specialists." A specialist covered only a few stocks (two to five, depending on how much volume there was), and all buy and sell orders for a particular stock went through the specialists. Needless to say, the specialists were experts in the stocks they covered. 

I learned much of what I know about trading from watching the Qualcomm options specialist in 1999. Back then, Qualcomm was among the most heavily traded stocks on the Nasdaq. That specialist made millions. And I still follow his example and make myself an expert in just a few stocks.

Like I told Mike, usually when I trade a stock I don't know like the back of my hand, I lose. And as it turns out, if I had chosen a PNC trade based on those earnings expectations, I would have no better than a 50–50 chance of making money.

Check out this PNC chart with just a couple lines on it: 

pnc 4 11 19

The purple lines are what you call a trading channel. PNC has been pretty consistent within that channel: It hit the top or bottom line and goes the other way. But see where the price is right now? Smack in the middle. The next move is an absolute crapshoot, and that's what I told Mike. 

I consider myself a specialist with Bank of America, and so I showed him the chart that got my Real Income Trader subscribers a 210% win last week:

bac 4 11 19

Now, Bank of America is in a sideways pattern. But the action is the same: It hit the bottom of the channel (highlighted in the bubble), and we jumped on for a 210% gain in a couple days. 

Here's the AMD chart that got us 276% in about a week:

amd 4 11 19

Again, all you have to do is draw a couple lines and have some patience, and you will see this very same trade set up again and again and again.

And if you're interested in the kinds of trades we've made in Real Income Trader, you can join us by clicking here.

Until next time,

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Briton Ryle

follow basic@BritonRyle on Twitter

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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